Arcus Biosciences, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. Arcus is a clinical-stage oncology biopharmaceutical company with four clinical-stage investigational products; it has no approved products and has never generated product-sales revenue.
Financial performance and position
| Metric | FY2020 | FY2019 |
|---|---|---|
| License and collaboration revenue | $77.5 million | $15.0 million |
| Research and development expense | $159.3 million | $78.5 million |
| General and administrative expense | $42.4 million | $25.2 million |
| Operating loss | $124.2 million | $88.7 million |
| Net loss | $122.9 million | $84.7 million |
| Basic and diluted loss per share | $2.24 | $1.93 |
- Revenue increased $62.5 million, primarily from the Gilead transaction: $55.1 million from the zimberelimab license and $15.4 million for pipeline access rights. Revenue is collaboration/license revenue, not product sales.
- R&D expense more than doubled, reflecting higher clinical and manufacturing costs, increased headcount, and license-related fees and milestones. Operating expenses rose 95%; the net loss widened 45%.
- At year-end, cash, cash equivalents and investments were $735.1 million, up from $188.3 million; working capital was $614.1 million, total assets $772.3 million and stockholders’ equity $502.3 million. The filing reports no debt balance.
- Net cash provided by operating activities was $111.2 million, compared with $73.5 million used in 2019. This was principally driven by $265.6 million of cash received at the Gilead transaction closing; it should not be interpreted as recurring operating cash generation. Investing activities used $434.4 million, mainly for purchases of marketable securities; financing activities provided $438.7 million, including equity proceeds.
- Undiscounted operating lease obligations totaled $112.6 million through 2031. No dividends were paid or expected in the foreseeable future.
Fourth-quarter results and period changes
In Q4 2020, revenue was $9.5 million, operating expenses were $61.5 million and net loss was $51.9 million, or $0.82 per share. Compared with Q4 2019, revenue was $9.8 million, expenses $27.3 million and net loss $16.6 million. Q3 2020 included $64.5 million of revenue and net income of $1.8 million; the full-year result remained a substantial loss.
Business developments, outlook and risks
- In July 2020, Gilead paid $175 million upfront, invested approximately $200 million in Arcus shares, and obtained a zimberelimab license plus options covering current and future programs under a 10-year collaboration. The agreement provides for up to $400 million in pipeline access payments, substantial program option fees, shared development costs and U.S. economics for programs Gilead opts into, and tiered ex-U.S. royalties to Arcus. These future payments and economics depend on contractual terms and, for program options, Gilead’s decisions.
- Arcus raised approximately $326.2 million net in its May 2020 public offering. In February 2021, after year-end, Gilead purchased 5.65 million shares for $220.4 million at $39 per share. Management said year-end cash and investments, together with its operating assumptions, should fund planned operations through 2023; actual needs depend on trial costs, program progress, collaboration funding and other factors.
- Management expects R&D and G&A expenses to increase substantially as trials advance and the company expands development capabilities. Arcus anticipates continued losses and does not expect product-sales revenue unless and until a candidate is approved and launched; profitability is uncertain.
- Pipeline highlights include domvanalimab in randomized Phase 2 NSCLC testing and a registrational trial initiated in February 2021; etrumadenant in multiple Phase 2/platform studies; AB680 in early-stage trials; and zimberelimab used as a combination backbone. The filing describes encouraging preliminary AB680 combination data in pancreatic cancer, but these early findings are not definitive clinical evidence.
- COVID-19 affected laboratory capacity and delayed one preclinical program; the pandemic may also disrupt trial enrollment and retention. Management reported sufficient supply for ongoing studies at the time of filing but could not predict the full pandemic impact.
- Key risks include clinical and regulatory failure or delay, competition, dependence on Gilead and other collaborators, single-source manufacturing and third-party trial execution, intellectual-property disputes (including disclosed BMS anti-PD-1 patents), and financing needs if collaboration payments or options do not materialize. Trial results and preliminary data may change as follow-up and verification continue.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded internal controls were effective at December 31, 2020. The auditor identified Gilead revenue recognition as a critical audit matter because it required significant estimates and judgment.
Important facts for investors to verify
- Reconcile the $735.1 million year-end cash-and-investments figure with the balance-sheet components and the cash-flow statement; distinguish liquidity from cash generated by operations.
- Track cash burn, spending growth and the assumptions supporting management’s stated runway through 2023, including the treatment and timing of Gilead payments.
- Monitor Gilead’s program option decisions, required access payments, cost-sharing terms, and the effect of its ownership and governance rights; separately account for the February 2021 share purchase.
- Review subsequent, controlled clinical data and trial progress for the four candidates, especially registrational studies, safety, enrollment, and whether early AB680 results are confirmed.
- Assess lease commitments, manufacturing concentration, patent exposure, and potential COVID-19 effects on research and clinical operations.